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Stop Picking On Spotify

TUESDAY, NOVEMBER 11, 2014|

Posted by: David Moffly

Daniel Ek just published a wonderful and articulate response to Taylor Swift's removal of her catalog from Spotify. In summary his position is that Taylor Swift is leaving money on the table and that Spotify pay the labels and performing rights societies an immense amount of money. Tangentially he blames the labels for not sharing this largess down to the artists themselves. In the post Mr. Ek asserts Spotify pays in excess of 70% of its revenue out to the labels and rights societies that represent the artists on the platform.

What Mr. Ek is really saying is that the labels and collection societies are ripping the artists off, not Spotify. The bulk advance payments and library access fees paid by the company (and others like it) most likely do not get shared or accounted for at the artist level. They are merely swept into the label's coffers for general and administrative purposes. To be frank, Taylor Swift, Jimmy Buffett, Thom Yorke and others have chosen an easy target to blabber to the media about and grandstand over.

Whats most interesting from my perspective is, for all the abuse Taylor Swift, Jimmy Buffett, Thom Yorke, and others inflict upon Spotify, the streaming service has a similar label problemone that makes their business tricky and largely unsustainable in its current configuration. They larger Spotify gets, the more money they lose. At some point, they will undoubtedly have to go bankrupt. The stream will start to buffer and labels will be forced to re-structure their financial demands on Spotify to make it a profitable business.

Mr. Eks life and the future of streaming would be much less fraught if folks acknowledged the existence of a holy trinity of massive financial misses for the labels that Spotify and their brethren are now being forced to make up for.

Music Television

Label executives still speak with rancor about Music Television. MTV became a multi-billion dollar programming machine off its humble beginnings as a promotional music video outlet.

iTunes / Apple

Apple ran off with all of the digital sales on iTunes for a spat, and off the back of these sales became the world's most profitable company.

Radio

If artists really want to complain, they should really focus their ire on radio. Even today, Radio pays only a small fraction of its revenue to ASCAP, BMI and SESAC. Except for those lucky few with direct deals with iHeart Radio (Taylor Swift among them), artists do not get compensated for the performance of their songs on the air waves. Radio has always been viewed as the most valuable promotional outlet available to an artist's visibility driving album and ticket sales.

However, Radio has long been a toy for hedge funds and private equity investors to play with. The high margins (thanks to negligible royalties to Artists) and stable cash flows have allowed for stations and groups to be traded amongst the funds like playing cards. Not only that, a compliant FCC has continually allowed for a greater concentration of ownership. While the crash of 2008 might have bankrupted a number of the groups, such concentration is now denser than ever. Today iHeart Radio, for example, reports sales of $6 billion dollars.

All of which brings us up to radios big financial score. Domestically, Ad Sales in the industry totaled $18 billion last year. If radio was forced to pay the same 70% that Spotify was every year, the labels could account for an additional $12.6 billion dollars. Roughly the equivalent to the global revenue of all record labels combined. Talk about leaving money on the table.

Unfortunately, the labels are too politically entrenched with radio to ever force a change. Like the labels will soon do to Spotify, such egregious royalty rates would force all major radio groups into bankruptcy a disaster to the labels as radio, not Spotify, is the only way to move the needle for an artist.

So the next time an artist complains about Spotify if they are serious about making money and serious about being fairly compensated for their performance and work they should call the FCC and Congressman to complain. Oh, and at substantial peril to their career, they should withhold their music from radio.